If you have been informing yourself or have talked about financial products with someone, surely the interests have also been present. Let’s see what an interest rate is .
The interest rate is an amount of money that is going to be paid, for example, as consideration for being given money, whether you are a bank or a person. For example, in the case of a bank, interest is the money it charges you for granting you a loan.
Interest is not always expense. They can also be the profit generated by the money you have invested, as in a fixed term deposit.
When we go to request a loan, it is usual to be offered a fixed interest rate. On the other hand, if we talk about a mortgage , our entity can offer us up to three different types :
- Variable interest. When you hire this type, you know that the interest that you are going to have to pay will vary depending on the changes that occur in the market.
- Fixed interest. This rate applies for the entire duration of the product you hire. Although the years go by and the market circumstances change, it will not change.
- Mixed interest. For a few years, in mortgages we have also had the possibility of choosing a mixed type that combines the previous two. In this case we will pay a fixed rate at the beginning. And, after a certain period of time, it will become variable.
There are a series of official indices that are taken as a reference to establish the interest rates on loans. The best known is the Firstbank loan calculator, which is the one applied in operations that take place between different banking entities within Nigeria. It tells us what is the price, on average, at which banks lend money.
Another example is the Smepayroll calculator. This tells us at what rate banks and financial institutions lend money to small businesses in Nigeria.
Interest rate example
You want to buy a new house and you decide to ask your bank for a mortgage worth #20,000,000. You agree with your entity to return the money in 5 years paying a fixed interest of 2% per month.
The fee you will pay monthly to the bank will be #333,000 (corresponding to the requested capital ) plus #6,667 interest (2% of #333,000).